Loews Corporation — Q1 2012 Form 10-Q
Period: Three months ended March 31, 2012; unaudited. Dollar amounts are in millions except per-share data. Loews is a holding company with principal businesses in insurance, offshore drilling, gas pipelines, oil and gas exploration and production, and hotels.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / prior date | Change |
|---|---|---|---|
| Revenue | $3,744 | $3,668 | +2.1% |
| Income before tax | $741 | $757 | -2.1% |
| Net income | $519 | $562 | -7.7% |
| Net income attributable to Loews | $367 | $379 | -3.2% |
| Diluted EPS | $0.92 | $0.92 | Unchanged |
| Operating cash flow | $328 | $1,129 | Lower |
| Assets at quarter-end | $77,240 | $75,268 at Dec. 31, 2011 | +2.6% |
| Total debt at quarter-end | $9,042 | $9,001 at Dec. 31, 2011 | +$41 |
| Total equity at quarter-end | $24,121 | $23,203 at Dec. 31, 2011 | +$918 |
Operating cash flow was $328; investing activities used $513 and financing activities provided $154. Cash declined $30 to $99. Short-term investments were $5,558 and total investments were $50,958. Parent-company cash and investments, net of receivables and payables, were $3.7 billion, versus $3.3 billion at year-end. The quarterly dividend remained $0.0625 per share. Loews reported book value per share of $48.96, up from $47.33 at year-end.
Consolidated pretax income as a share of revenue was approximately 19.8%, compared with 20.6% in Q1 2011; this broad ratio spans materially different businesses. CNA Specialty’s combined ratio worsened to 97.3% from 95.1%, while CNA Commercial’s improved to 106.2% from 108.0%.
Material changes and business drivers
- CNA Financial: Loews-attributable net income rose to $226 from $199, supported by higher investment income, improved investment gains and lower catastrophe losses. CNA recorded $43 of favorable prior-year development, versus $35 a year earlier.
- Diamond Offshore: Loews-attributable income fell to $87 from $117. Drilling revenue declined 4.3% and drilling expense rose 9.7%, reflecting lower mid-water utilization and higher international operating costs. One jack-up rig sale produced an approximately $25 gain.
- HighMount: Loews recorded a $22 loss, versus $19 income. Revenue fell to $76 from $104 amid lower gas prices and sales volumes. A non-cash $44 pretax impairment ($28 after tax) reflected lower natural-gas prices.
- Boardwalk Pipeline: Loews-attributable income increased to $35 from $33. The quarter included $12 of revenue from HP Storage, acquired by Boardwalk; Loews’ ownership in Boardwalk decreased from 64% to 61% after a unit offering.
- Corporate and other: Loews-attributable income increased to $35 from $7, principally from stronger returns on equity investments in the trading portfolio and lower expenses.
Outlook, risks and unusual items
- Management gave no consolidated earnings guidance. HighMount said that if prices remained unchanged through 2012, and other assumptions held, full-year non-cash after-tax ceiling-test impairments could be approximately $400–$450, inclusive of Q1; actual charges depend on prices at each measurement date.
- Diamond Offshore described strong ultra-deepwater and deepwater markets and potential upward dayrate pressure, but noted limited near-term availability from its contracted backlog and substantial new rig construction industry-wide. Backlog was $8.2 billion at April 16, 2012, subject to utilization, downtime and other assumptions.
- Diamond Offshore’s stated construction costs were approximately $1.8 billion for three drillships and $300 for a semisubmersible rig. Its 2012 capital expenditure budget was approximately $550, including construction and ongoing rig programs.
- CNA agreed to acquire Hardy Underwriting for approximately $227 in cash, subject to approvals and other conditions; completion was expected in Q2 2012. CNA held $230 of short-term investments in escrow for the acquisition.
- Key exposures include insurance reserve estimation and catastrophe losses; investment valuation, credit and interest-rate risks; oil and gas prices and production; offshore rig utilization and dayrates; and pipeline competition, basis spreads and contract renewals. Loews also relies on subsidiary distributions, which may be limited by regulation, subsidiary liquidity and debt covenants.
- HighMount’s natural-gas hedges covered approximately 51.4% of estimated 2012 and 20.3% of estimated 2013 equivalent production at weighted-average prices of $6.01 and $6.70 per Mcfe, respectively.
- Legal matters include an approved insurance-brokerage litigation settlement, with appeals filed by objectors in April 2012; the company said it expected no material impact. Loews also faces tobacco-related suits, which it disputes and for which Lorillard has agreed to indemnify Loews under a separation agreement. The filing notes quantifiable indemnification agreements of $763 and additional unlimited indemnifications.
- The company adopted updated insurance acquisition-cost accounting guidance, retrospectively where practicable. It adjusted comparative Q1 2011 figures; adoption reduced reported comparative net income by $3. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material change in market risk components was reported.
Important facts for investors to verify
- Whether HighMount’s commodity-price assumptions and hedges mitigate further impairments, and how any subsequent write-downs affect results and credit covenants.
- CNA’s reserve adequacy, underwriting trends and the durability of favorable prior-year development and investment income.
- Diamond Offshore’s actual rig utilization, dayrates, international operating costs, backlog conversion and funding of its major construction commitments.
- Boardwalk Pipeline’s contract-renewal economics amid changing basis spreads, as well as its leverage, capital spending and HP Storage integration.
- Parent-company liquidity and the availability of subsidiary distributions, alongside contingent liabilities, legal outcomes and indemnification recoveries.